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Transcript of 1 Oregon Short-Term Fund 2008 OMFOA Spring Conference March 11, 2008 Linda Haglund – Deputy State...
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Oregon Short-Term Fund
2008 OMFOA Spring Conference
March 11, 2008
Linda Haglund – Deputy State TreasurerPerrin Lim – Sr. Fixed Income Investment Officer
Office of the State Treasurer
22008 OMFOA Spring Conference March 11, 2008 OSTFB
Oregon Short Term Fund – Management structure and implementation
1. Role of Oregon Investment Council (OIC)
2. Investment Process of OSTF Sources of information Forecasting Research Market analysis – pricing
32008 OMFOA Spring Conference March 11, 2008 OSTFB
Role of OIC
Oversight of state financial assets and local government deposits in OSTF
Treasurer & staff implement directions of OIC
PERS, SAIF, Common School Fund, State Agency accounts and the OSTF
Current Assets under management: over $78 Billion
Establishes unique investment policy for each account
Total Portfolio Asset Class Allocation Asset Class Specific Manager or Fund Specific (OSTF)
42008 OMFOA Spring Conference March 11, 2008 OSTFB
First step in policy development – Know your client
Purpose of funds Volatility/Risk tolerance Return objective Liquidity Requirements
For the OSTF, the OIC looks for input from the Oregon Short Term Fund Board.
52008 OMFOA Spring Conference March 11, 2008 OSTFB
Common elements for all include:1. Type of Securities
Governments, corporate, stocks, real estate, private equity, commercial paper, private placements.
Large cap vs. small cap Domestic vs. International
2. Risk “of” the security’s characteristics Emerging vs. Developed Market Maturity limits and Duration target for Bonds Security rating minimum/maximum
3. Prohibited Investments
4. Compliance/monitoring/reporting
5. Benchmark Expected return over the benchmark
6. Time frame for evaluation Longer term assets – market cycle 3-5 years Short term assets –90 days, rolling, over time
62008 OMFOA Spring Conference March 11, 2008 OSTFB
Total Portfolio Asset Class Allocation Policy Example – OPERF
Asset Class
Target Allocation
(%)
Re-
balancing Range
(%)
Expected Annual
Policy Return1
(%)
Expected Annual Active Management
Return (net of fees)
(%)
Expected Annual Total
Return (%)
Public Equities 46 41-51 9.0 0.75 9.7 Private Equity 16 12-20 10.7 1.3 12.0 Total Equity 62 57-67 Fixed Income 27 22-32 5.7 0.75 6.4 Real Estate 11 5-11 6.3 0.75 7.0 Total Fund 100 8.1 0.8 8.9
Policy Mix and Return Expectations for OPERF Regular Account
1 Based on capital market forecasts developed by the Council’s investment consultant, SIS, for the next two to three market cycles.2 Total Fund expected returns are simply the weighted averages of the asset class returns.
Sample
72008 OMFOA Spring Conference March 11, 2008 OSTFB
Manager or Fund Specific Policy Example - OSTF
SAMPLE ELEMENTS......
Maturity Distribution of PortfolioA. 50% of the portfolio must mature within 93 days.
B. A maximum of 25% of the portfolio may mature over one year.
C. No investment may mature in over 3 years as measured from settlement date.
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Sample OSTF Policy Elements… continued
Diversification and Limitations of Portfolio
A. Eligible Securities:
1) U.S. Treasury Securitiesa. 100% of the portfolio may be in U.S. Treasury securities.
2) U.S. Government Agency Securitiesa. 100% of the portfolio may be in U.S. Government Agency securities.b. 33% maximum of portfolio per agency issuer.
Additional Securities include: Corporate Indebtedness Negotiable Certificates of Deposit (NCD’s)
B. All portfolio investments will be denominated in US$ only.
C. 10% maximum of portfolio per issuer on all securities and support commitments with the exception of U.S. Treasury (100% maximum) and Government Agency securities (33% per issuer).
Bankers' Acceptances (BA’s) etc, etc…
92008 OMFOA Spring Conference March 11, 2008 OSTFB
Sample OSTF Policy Elements… continued
CREDIT QUALITY
Total weighted average credit quality of the portfolio shall be a minimum of AA or Aa2.
PORTFOLIO LIMITATION
No commitments to buy or sell securities may be made more than 14 business days prior to the…
102008 OMFOA Spring Conference March 11, 2008 OSTFB
For OSTF, OIC hands this investment road map to Perrin’s team
Next step, develop a “process” to implement.
Many with solid policies in place, still stumbled.
How did we miss the recent landmines?
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The Oregon Short-Term Fund (OSTF)…
Employs an active team managed strategy that incorporates a top-down economic and interest rate outlook combined with bottom-up security selection, seeking to add value while adhering to a disciplined risk control process.
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Staff’s Investment Objectives
Preservation of Principal Liquidity A Market Rate of Return
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Portfolio Construction
As detailed in OSTF Portfolio Rules, generally consists of:
High Quality, Top-Tier Commercial Paper High Quality Corporate and Bank Obligations US Agencies US Treasuries
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Value can be added through three main strategies:
1. Sector Allocation
Ongoing research, analysis, and evaluation of market sectors with respect to current market prices, i.e. spread or risk premium
152008 OMFOA Spring Conference March 11, 2008 OSTFB
Value can be added through three main strategies:
2. Issue SelectionPrimarily a bottom-up process to uncover mispriced or undervalued credits and/or securities
162008 OMFOA Spring Conference March 11, 2008 OSTFB
Value can be added through three main strategies:
3. Weighted Average Maturity (WAM) Exposure
Target WAM based on domestic (and international) macro-economic factors as well as the general political environment
Staff weighs its views vs. market expectations, increasing WAM as views diverge and vice versa as views converge
Goal is to add value based on the longer term trend and positioning the fund’s WAM accordingly, not timing the market
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OSTF Investment Process
Investment Outlook
OSTF Portfolio Rules
Sector Allocation
OSTF
Implementation
Monitoring & Controls
Interest Rate
Exposure
Issue Selection
External Manager Resources
Internal Research
Third Party Research Ratings Agencies Street Research
182008 OMFOA Spring Conference March 11, 2008 OSTFB
How Did OST Staff Avoid Recent Landmines?
Investment Policy – Dictates all portfolio decisions Always keep in mind investment objectives
1. Preservation of Principal
2. Liquidity
3. Yield
192008 OMFOA Spring Conference March 11, 2008 OSTFB
How Did OST Staff Avoid Recent Landmines?
Staff Outlook – Results in general portfolio structure
Experience over past market cycles is a huge benefit!
Better to be lucky than good… Learn from past mistakes…to help prevent them in the
future Not a “Black and White Science”
202008 OMFOA Spring Conference March 11, 2008 OSTFB
Overview of Security Selection Process1
Short Term or Long Term? US Treasuries, Agencies or Credit?
Always consider worst case scenario
1 The OSTF Investment and Security Selection Processes are appropriate for the OSTF only.
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Overview of Security Selection Process
Relative Value in CreditWhy not buy all issues that fit portfolio guidelines?
Citigroup Inc. (C) versus CIT Group Inc. (CIT) Credit Curves are an important indicator (fixed vs. float, 2 yr vs. 10 yr) Balance Sheet Analysis Debt Ratio Trends Cash Flow Analysis Near Term Maturities Credit Facilities Current Credit Profile, Ratings 10-K Reports: Management’s Discussion and Analysis Event Risk: LBO’s, Share Repurchases
222008 OMFOA Spring Conference March 11, 2008 OSTFB
Credit Curves (spread versus Libor)2
2 year 5 year Issuer
Fixed Floating Fixed Floating C (Aa3/AA-/AA) +120/+110 +65/+55 +155/+140 +130/+115 CIT (A2/A/A) +360/+335 +750/+660 +370/+320 +660/+615
2 Approximate spreads as of February 29, 2008
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Balance Sheet Analysis
Liquidity – Cash & Near Cash Amounts
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Debt Ratio Trends
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Cash Flow Analysis
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Near Term Maturities
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Related Securities, Credit Facilities (e.g. see Bank Loans)
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Credit Profile
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Summary: Take Aways
Investment Policy dictates investment of assets
Mistakes happen…Goal is to learn and minimize in the future
Know what one buys…Don’t rely only on ratings
Always consider Worst Case Scenario/Reaching for Yield – Sleep Factor
If 2-year US Treasuries bought and 2-year Treasuries increase 200 b.p.?
If credit bought and issuer experiences negative headlines
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OSTF Statistics & Compliance
OSTF Statistics & Compliance, as of February 29, 2008: Compliance Policy Actual Par Value
Maturity Distribution Portfolio maturities less than 93 days > 50% 77.451% $8,883,471,000 Portfolio maturities between 94 days & 1 year 6.800% 779,945,000 Portfolio maturities greater than 1 year < 25% 15.749% 1,806,344,000 Maturities greater than 3 years 0% 0.000% 0
Total Maturity Distribution 100.000% $11,469,760,000 Diversification
Treasury and/or Agency Securities 0-100% 53.757% $6,165,751,000 Commercial Paper (minimum A-1/P-1) < 50% 22.930% 2,549,909,000 Commercial Paper (< A-1/P-1) 0% 0.00% 0 Corporate Bonds < 25% 22.232% 2,549,909,000
Total Corporate Indebtedness < 50% 45.162% 5,179,959,000 Repurchase Agreements 0-100% 0.000% 0 Reverse Repurchase Agreements 0-100% 0.000% 0 Time Certificate of Deposit’s < 20% 1.082 % 124,050,000
Total Diversification 100.000% $11,469,760,000 Total Average Credit Quality
Moody’s or Standard & Poor’s Minimum Aa2 or AA
Aa1/AA+
Corporate Bonds Downgraded after purchase: Merrill Lynch & Co. Inc. Current: A1/A+/A+
Interest Rate Exposure (adjusted for variable rate securities) WAM, exposure in days 157 days
Fixed versus Floating Weights: Fixed Rate 80.664% $9,251,967,000 Variable Rate 19.336% $2,217,793,000
Total Return Performance, ending January 31, 2008: January 3 mos. YTD 1 yr 2 yrs 3 yrs 4 yrs 5 yrs OSTF 0.57 1.36 0.57 5.55 5.35 5.35 4.66 3.87 91 Day T-Bills 0.50 1.26 0.50 5.10 5.03 4.42 3.66 3.15